September 2010 Archive for Out to Pasture

Let's look at some scenarios I mentioned in last week's blog. I picked, at random, from a real estate googleizaton, a place that is listed for sale in Texas. It is not, of course, representative of agriculture overall. But then, which piece of land is?

A generation ago, about the time I would have bought that place, it would probably have been worth $600 per acre. It probably didn’t have the improvements. It certainly, at that time, didn’t have the “recreation value” that now drives real estate prices in that part of Texas. I still couldn’t have bought it and expected it to pay for itself without bringing something major to the table—capital, extremely good market timing or extraordinary management of some sort. I suppose there are times in history when you could buy land and expect a plain old commercial cow herd to pay for it, but I missed them.

So, somebody bought it anyhow. I have no idea who or why, and didn’t want to call to find out. It doesn’t matter, because there are only a few scenarios likely:

Scenario 1: It was a place for some Dallas lawyer-type, W. Robert, we’ll call him, to spend the weekends, impress his drinking buddies and clients, and manage some taxes.

So let’s say W. Robert passes to the court room in the sky

The place is now worth—you can see it plain as day in the ad--$13 million. So the tax bill, at the 55% we’ll see next year, would be over $7 million. More than $1600 per acre. That is almost $12,000 per (advertised, of course) animal unit.

Scenario 1A: His kid, J. Robert, II, is a lawyer as well. There is other money out there, so he can afford the $7 million if he wants to pay it. But does he? Did he also inherit his dad’s affection for slaying deers and managing hired help from his Dallas office?

If not, that place goes on the market.

Scenario 1B: His kid teaches school. The old man tied up most of his cash in the family ranch. Sure, there’s a couple million in bonds and stocks and cd’s, enough to provide the cash flow for a comfy retirement. But the IRS wants 55% of that, too. So, the son has a million in cash, but there’s still that $7 million bill to pay.
That place is going on the market.

Now, scenario 2. It’s a family ranch. Old Jim Bob is out there scratching a living out of 600 cows and a deer lease. His boy, Junior, teaches ag in town and helps out on the weekends. All he really wants to do is ranch.

So, Jim Bob falls over dead on Jan. 2, 2011.

Where is Junior going to find $7 million? That’s real money outside of D.C. Jim Bob might have had enough stocks, bonds, cash, cattle and marketable old clothes to cover his production note at the bank. More likely, he had refinanced at some point. There aren’t many bankers out there anxious to write a note for $12,000 per animal unit, and even if Junior found one, 600 cows aren’t going to make the payments.

Now, here’s my guess. J. Robert probably has a nice estate plan that protects his kids. They may not be able to derive a lot of income from the place. It may be locked away like the Kennedys’ trust funds, or grandma’s wedding ring, but they won’t have to come up with $7 million. If they do, Daddy probably had an insurance policy to cover it.

Lawyers and rich guys have the resources to do things like that.

So, that place might stay in the same hands. If the kids want their money, they’ll put it on the market. But, assuming they don’t need the cash and they enjoy owning the land, they’ll figure there are worse places to leave your $13 million than in real estate.

But what about Jim Bob’s kids?

Jim Bob’s estate management options were much more limited. He needed every penny those cows could generate. He probably couldn’t afford the premiums on a 70-year-old cowboy’s $7 million life insurance program.

At least half of that country is going on the market pronto. Junior will have to try to make a living with 300 aum’s or keep his job.

Now, let’s all make a value judgment here. What should we wish for? I don’t mean us, actually. We’d be inclined to vote for keeping our places in the family, of course. But if we really, really, believe there should be more opportunity for young people.

The typical argument from the Willy Nelson lobby is that higher prices for cattle and corn and cotton would fix that. That’s bunk. How are higher prices for cattle going to help a kid with no cattle compete with a guy with thousands of them?

We’ve all spent our lives in an agriculture where land ownership is the only retirement program we know. Real estate inflation has always been agriculture’s greatest economic return. Take that away and where’s the reward?

We’re all agreed that we need more opportunity for young people in agriculture, aren’t we? How are we going to do that if J. Robert II keeps it, living like some feudal landlord? Is it ok to rely on absentee landowners? Let the rest of us rent or work for wages? Is that the opportunity we want for young people?

Or do we want them to share the old American farm dream of land ownership?

We all agree that Junior should be able to keep the family ranch. But do we all—including Willy Nelson--agree that the heirs of the Ted Turners of the world should be able to own unlimited amounts of land, and own it in perpetuity?

Under which of these scenarios are we best served?

Keep the 55% rate, so that only the lawyer’s rich lawyer son gets to keep owning the place? He’s probably going to hire a local—maybe the local ag teacher--to manage the outfit. Or he’ll rent it out. Either provides a way for the local, under-capitalized, boy to get a start in agriculture. If it’s really agriculture he wants, and not land ownership.

What if we stay where we are now, with a 0% estate tax? Jim Bob’s boy can just move in and start ranching. The lawyer’s teacher kid can either keep the place (and hire the local ag teacher to manage it or rent it out). In either case, you’ve giving a young person a more realistic entry.

But only if his daddy has something to pass down, so it’s not going to reverse the concentration if that’s you big concern.

Where, along the bell curve with the Kennedys and the Ted Turners on one end and the Jim Bobs and Juniors on the other, should we ask Congress to draw the line?

That’s the question Congress has to decide in the near future. You should consider that before you choose your candidate this fall. Just how big a Willy Nelson fan are you?